Set-off and Carry Forward of Capital and Business Losses

Introduction

A taxpayer may earn profits from one activity while suffering losses from another. The Income-tax law permits certain losses to be adjusted against taxable income. This adjustment is known as the set-off of losses.

Where the entire loss cannot be adjusted in the year in which it arises, the unadjusted amount may, subject to prescribed conditions, be carried forward to later years. However, different rules apply to capital losses, normal business losses, speculative losses, futures and options losses and virtual digital asset losses.

Applicable Law and Transition to the Income-tax Act, 2025

Returns for FY 2025-26 or AY 2026-27 continue to be governed by the Income-tax Act, 1961, even though the return is filed after the Income-tax Act, 2025 came into force on 1 April 2026.

Income earned during FY 2026-27 is governed by the Income-tax Act, 2025 and is referred to as Tax Year 2026-27. Valid losses determined under the 1961 Act continue under the new Act without losing their original character or restarting their carry-forward period.

The Income-tax Act, 2025 substantially retains the earlier set-off and carry-forward framework while reorganising and simplifying the provisions.

What Is an Intra-Head Set-off?

Intra-head set-off means adjusting a loss from one source against income from another source falling under the same head of income.

For example, a taxpayer carrying on two non-speculative businesses may generally adjust the loss from one business against the profit from the other business.

Capital gains are also adjusted within the capital-gains head, but special restrictions apply:

• A short-term capital loss can be set off against short-term or long-term capital gains.
• A long-term capital loss can be set off only against long-term capital gains.

These restrictions apply both in the year of loss and when the loss is carried forward.

What Is Inter-Head Set-off?

Inter-head set-off means adjusting a loss under one head of income against income taxable under another head.

A current-year non-speculative business loss may generally be adjusted against income under other heads, including house-property income, capital gains and income from other sources.

Capital Losses

Capital losses arise when a capital asset is transferred for less than its tax-recognised cost, subject to the applicable capital-gains computation provisions.

Short-Term Capital Loss

A short-term capital loss may be set off against:

• Short-term capital gains; and
• Long-term capital gains.

Any unadjusted short-term capital loss may be carried forward for up to eight assessment years or tax years immediately following the year in which the loss was first computed.

Long-Term Capital Loss

A long-term capital loss may be set off only against long-term capital gains. It cannot be adjusted against:

• Short-term capital gains;
• Salary income;
• Business income;
• Interest or dividend income; or
• House-property income.

An unadjusted long-term capital loss may also be carried forward for up to eight years.

Non-Speculative Business Losses

A normal or non-speculative business loss may arise from a business or profession that is not classified as a speculation business.

Set-off in the Same Year

A current-year non-speculative business loss may generally be adjusted against:

• Profit from another non-speculative business or profession;
• Eligible income from other sources;
• House-property income; and
• Capital gains.

It cannot be adjusted against salary income.

Set-off in Later Years

Once carried forward, a non-speculative business loss can be set off only against profits and gains from a business or profession carried on by the taxpayer.

It can be carried forward for up to eight assessment years or tax years immediately succeeding the year in which it was first computed.

The business that originally generated the loss does not ordinarily have to continue. The carried-forward loss may generally be set off against profits of another eligible business carried on by the same taxpayer, subject to provisions governing succession, ownership changes and specified transactions.

Speculation Business Losses

A speculative transaction generally includes a contract for the purchase or sale of commodities, stocks or shares that is settled otherwise than through actual delivery, unless the transaction falls within a statutory exception.

Intraday equity trading, where shares are purchased and sold without delivery, is generally treated as speculative business.

A speculation loss:

• Can be set off only against profits from another speculation business;
• Cannot be set off against normal business profits;
• Cannot be set off against F&O profits where the F&O transactions qualify as non-speculative transactions;
• Cannot be set off against salary, capital gains, interest or house-property income; and
• Can be carried forward for only four assessment years or tax years.

The carried-forward speculation loss can also be adjusted only against speculation profits.

Treatment of Futures and Options Losses

Eligible transactions in derivatives carried out electronically through a recognised stock exchange and supported by prescribed transaction records are excluded from the definition of speculative transactions.

Therefore, eligible F&O trading losses are generally treated as non-speculative business losses, not speculation losses.

An eligible F&O loss may consequently:

• Be adjusted against profits from another eligible business or profession;
• Be adjusted against permitted income under other heads in the same year, but not salary income; and
• Be carried forward for up to eight years for set-off against eligible business or professional income.

Virtual Digital Asset Losses

Losses from the transfer of virtual digital assets, including taxable crypto-assets, are subject to a complete statutory restriction.

Thus, where a taxpayer earns a profit from one crypto transaction and suffers a loss from another, the losing transaction does not reduce the taxable profit from the profitable transaction. The applicable return schedule consequently treats the loss from an individual VDA transaction as nil for aggregation purposes.

Return Must Be Filed Within the Due Date

To carry forward the following losses, the return of income or loss must generally be filed within the applicable due date:

• Short-term capital loss;
• Long-term capital loss;
• Non-speculative business loss;
• F&O business loss;
• Speculation business loss; and
• Specified-business loss.

For FY 2025-26 and AY 2026-27, the condition arises under Section 139(3), read with Section 80 of the Income-tax Act, 1961. Under the Income-tax Act, 2025, the corresponding condition appears in Sections 263(1) and 121.

Important Exceptions

The due-date restriction applicable to business and capital losses does not apply in the same manner to:

• House-property losses; and
• Unabsorbed depreciation.

Unabsorbed depreciation is governed by separate provisions and is not subject to the ordinary eight-year business-loss limit. It should not be combined with normal business losses while preparing the return.

Summary of Set-off and Carry-Forward Rules

Reporting Losses in the ITR

Taxpayers should ensure that losses are correctly reported in the relevant income schedules. Depending on the ITR form, the final adjustment may appear in:

• Schedule CYLA for current-year loss adjustment;
• Schedule BFLA for brought-forward loss adjustment; and
• Schedule CFL for losses carried forward to future years.

VDA transactions must be reported separately in Schedule VDA. The return utility generally calculates the permitted adjustment after the underlying income and loss schedules are completed.

Common Mistakes

• Adjusting a long-term capital loss against short-term capital gains;
• Setting off capital losses against dividend or interest income;
• Treating all stock-market losses as capital losses;
• Treating eligible F&O losses as speculation losses;
• Adjusting intraday speculation losses against F&O profits;
• Setting off one VDA transaction loss against another VDA transaction profit;
• Filing a loss return after the due date and expecting the loss to be carried forward;
• Failing to enter earlier-year losses in Schedule BFLA;
• Claiming losses already exhausted or outside the permissible carry-forward period; and
• Combining normal business loss with unabsorbed depreciation.

Practical Takeaways

Conclusion

Set-off and carry-forward provisions can reduce the effect of genuine commercial and investment losses, but the rules are not interchangeable.

A taxpayer must first determine whether the loss is a short-term capital loss, long-term capital loss, normal business loss, F&O loss, speculation loss or VDA loss. The correct classification determines the income against which the loss may be adjusted, the period for which it can be carried forward and whether timely return filing is mandatory.

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